California Real Estate Journal April 6, 2009 : Page 17

ECONOMIC DEVELOPMENT S P E C I A L RE POR T Enterprize Zones Gain Attention in Recession Budget issues threaten statewide tax credit program BY GREG KANE CREJ Staff Writer A vision of stimulus dollars. Struggling communi- ties, like Oxnard and Escondido, thirst for des- ignation as an enterprise zone. EZ designees want to remain designees, and non-designees want designation — ASAP. Businesses throughout California should A investigate whether they are located in an EZ and qualify to reap its many benefi ts. California’s EZs were developed long before the nation’s current fi nancial downturn. Their value has only been enhanced by our economic woes. Last year alone, the Franchise Tax Board reports that taxpayers located in EZs received $290 million in state tax benefi ts, among other local benefi ts. The report has caused the public and private sectors alike to wonder whether they could have, should have or can in the future take advantage of EZ money. What is the Purpose of an EZ? The Enterprise Zone Act authorizes the Department of Housing and Community Development to designate up to 42 California communities as EZs. EZs are designed to stimulate business growth in underperform- ing areas by providing various monetary and other incentives. EZ tax benefi ts alone create a climate where low-growth communities can develop more quickly than would be expected without these benefi ts. To qualify for EZ designation, a community must demonstrate an ailing local economy. Typically, a community maintains EZ designa- tion for 15 years. Recent reports indicate that the HCD has received a record, and still grow- ing, number of applications from municipal governments seeking EZ designation. The following list is of EZs that currently benefi t from at least a conditional EZ designation. As of press time, 40 EZs exist. Sacramento — Florin Perkins expired on April 4. Los Angeles — Harbor and Sacramento — Army Depot, however, are set to expire by the end of the year. The HCD, therefore, anticipates WWW.CAREALESTATEJOURNAL.COM growing number of California communities looking to feed the job base and increase revenues in impoverished areas are turn- ing to a decades-old statewide tax credit program — even as fears increase that it could be on the menu with the state’s ongoing budget crisis. The state enterprise zone program offers tax credits to businesses for locating and hiring in- side one of 42 designated areas across the state, according to the state Department of Housing and Community Development. Companies also receive tax credits from some machinery and equipment purchases and often receive additional support from local government, said Greg O’Sullivan, president of the Shasta Metro Enterprise Zone. At least one study estimated that the program GUEST COLUMN Getting Your Hands on EZ Money BY MICHAEL GONZALES AND ZEIN OBAGI JR. little-known competition rages among California’s economically depressed areas — and it does not involve the pro- � Antelope Valley � Arvin � Barstow � Calexico - County � Coachella Valley � Compton � Delano � Eureka � Fresno City � Fresno County � Imperial Valley � Kings County � Lindsay � Long Beach � Los Angeles - East � Los Angeles, Harbor Area � Los Angeles, Hollywood � Merced � Oakland � Oroville � Pasadena � Richmond � Sacramento - Army Depot � Sacramento - Northern � Salinas Valley � San Bernardino (Agua Mansa) designating up to four additional EZs during the current application round. How CanYou Benefi t from an EZ? EZs provide a wide range of tax credits and other economic incentives. The act authorizes an array of tools to stimulate growth. Local governments have wide latitude to select which tools will apply in a particular EZ. A business may qualify if it is located in an EZ and conducts at least 50 percent of its business there. Incen- tives include a hiring credit, sales or use tax credit, special business expense deduction, and a carry forward of 100 percent of net operating losses for 15 years, exceeding the standard 10-year allowance. For example, an EZ business may claim an EZ hiring credit for qualifi ed employees for a period of fi ve years from that employee’s hiring date. Businesses that move to an EZ with quali- fi ed employees already on payroll can claim an EZ hiring credit provided that qualifi ed employee has been on payroll for less than fi ve � San Diego � San Francisco � San Joaquin � San Jose � Santa Ana � Santa Clarita � Shafter � Shasta Metro � Siskiyou County � Southgate - Lynwood � Stanislaus � Watsonville � West Sacramento � Yuba – Sutter years. EZ hiring credits are not available for qualifi ed employees on payroll for more than fi ve years. The maximum EZ hiring credit avail- able in a qualifi ed employee’s fi rst year is $6 of the hourly wage paid. In an employee’s fi rst year, an EZ business can claim a tax credit of up to $12,000. This amount decreases for each year of employment and disappears after an employee’s fi fth year at the business. To claim this credit, both the qualifi ed employee and business must receive certifi cation from a local agency verifying the employee’s eligibility. Qualifi ed businesses may also claim credits for state sales or use tax paid for industrial machinery and common offi ce supplies such as photocopiers, telephones and fax machines. Of particular relevance in this economy, EZ benefi ts also extend to banks, the institutions in the nation’s spotlight. Lenders may deduct the net interest income received from a loan to a business located solely within an EZ during the effective dates of the EZ. This EZ benefi t may incentivize lenders to open credit — if EZ businesses alert lenders to the deduction. Besides tax credits and deductions, the act authorizes state agencies and local govern- ments to lease property to EZ businesses at a price below fair market value. Local govern- ments may also relax building codes and zon- ing laws, streamline the permitting process and eliminate or reduce taxes for EZ businesses. The act also empowers municipalities to develop local EZ incentives, and many have. However, EZ benefi ts are not automatic. Private businesses must claim EZ benefi ts or forego them. Lack of EZ publicity has been cited by scholars as one factor believed to diminish from EZs’ success. For example, the Los Angeles Department of Water and Power offers a fi ve-year electric rate discount to new businesses that move into an EZ. A business must apply for the rate discount, as The LADWP will not automatically grant it. A reliable list of EZs and local incentives can be found at www.ezpolicyblog.com. Are EZs Effective at Achieving Growth? Though many already have reaped EZ mon- ey for years now, obtaining EZ money requires awareness, which may be lacking despite the program’s lengthy existence. Moreover, academics disagree on EZ money’s effi ciency. Studies by David Neumark and Jed Kolko of the Public Policy Institute of California have concluded that EZs do not stimulate job creation and question whether the program is worth its costs to the public coffers. But University of Southern California Profes- sor Charles Swenson argues that jobs should not be the only factor analyzed. An accurate analysis of EZs must account for numerous factors indicative of prosperous economic activ- ity. Newsweek recently credited, in part, the Compton EZ for the development of a lavishly landscaped $65 million strip mall on a previ- ously vacant lot. Regardless of these differences, EZ money Michael Gonzales is a senior associate and Zein Obagi Jr. is a junior associate with the Los Angeles offi ce of Allen Matkins Leck Gamble Mallory & Natsis LLP. is available and can amount to real savings for many businesses. Businesses should consider which benefi ts they could claim, or the EZ op- portunities they may want to pursue to mitigate against existing harsh economic times.� CALIFORNIA REAL ESTATE JOURNAL APRIL 6, 2009 PAGE 17 created 300,000 jobs across the state during a 10-year period ending in 2002, and managers say it has been crucial in keeping fi rms that oth- erwise might have left the state. But critics say the loss of millions in tax dollars to state coffers outweighs the program’s benefi ts. The state Legislative Analyst’s Offi ce recom- mended in February that the 31 enterprise zones reauthorized in 2006 be rescinded and the remainder be allowed to expire, a move that would generate an expected $100 million in recaptured taxes during the 2009-10 fi scal year. Similar recommendations have gone unheeded in the past, but with California legislators struggling to cover the state’s latest $8 billion projected shortfall, the threat has sharper teeth this year, said Craig Johnson, president of the California Association of Enterprise Zones. “Even in the best of times in the California budget process, we’ve been hearing this,” said Johnson, who also oversees the enterprise zone in Long Beach. “However, this economic situa- tion is different.” An emergency budget measure approved in October halved the amount businesses in an enterprise zone could use to offset taxes in 2008 and 2009. And some observers in Sacramento expect several legislative attempts to limit the program to be unveiled in the coming weeks, forcing supporters to go on the defensive for the fi rst time in four years. “I think you’re going to have an all-out battle on enterprise zones similar to what we saw in the 2005-06 legislative session,” said Toni Symonds, the chief consultant to the state Assembly Com- mittee on Jobs, Economic Development and the Economy. During that session, the committee conducted four months of hearings that led to a series of program changes. Still, Johnson and other proponents say the program generates more dollars for the state treasury than it loses from tax credits by increasing economic output and creating more jobs and, consequently, taxpayers. Threats to scale back the program also haven’t stopped cities from lining up to participate: Nearly a dozen were expected to submit applications for four zones up for renewal by a March 27 dead- line, said ChrisWestlake, deputy director of the state Department of Housing and Community Development. “As more cities and localities become aware of the program, they realize the benefi ts of it,” Westlake said. “They all start wanting one for their area to help during these economic times.” Zone Advantages The zones run the gamut from small industrial centers in cities to large swaths of rural areas, Johnson said. All have several factors in common: They are economically distressed and featuring high poverty and unemployment levels. Zones are designated for 15 years, after which See ENTERPRISE, page 28

Enterprize Zones Gain Attention in Recession

Greg Kane

Budget issues threaten statewide tax credit program<br />
<br />
A growing number of California communities looking to feed the job base and increase revenues in impoverished areas are turning to a decades-old statewide tax credit program — even as fears increase that it could be on the menu with the state’s ongoing budget crisis.<br />
<br />
The state enterprise zone program offers tax credits to businesses for locating and hiring inside one of 42 designated areas across the state, according to the state Department of Housing and Community Development. Companies also receive tax credits from some machinery and equipment purchases and often receive additional support from local government, said Greg O’Sullivan, president of the Shasta Metro Enterprise Zone.<br />
<br />
At least one study estimated that the program created 300,000 jobs across the state during a 10-year period ending in 2002, and managers say it has been crucial in keeping fi rms that otherwise might have left the state. But critics say the loss of millions in tax dollars to state coffers outweighs the program’s benefi ts.<br />
<br />
The state Legislative Analyst’s Offi ce recommended in February that the 31 enterprise zones reauthorized in 2006 be rescinded and the remainder be allowed to expire, a move that would generate an expected $100 million in recaptured taxes during the 2009-10 fi scal year.<br />
<br />
Similar recommendations have gone unheeded in the past, but with California legislators struggling to cover the state’s latest $8 billion projected shortfall, the threat has sharper teeth this year, said Craig Johnson, president of the California Association of Enterprise Zones.<br />
<br />
“Even in the best of times in the California budget process, we’ve been hearing this,” said Johnson, who also oversees the enterprise zone in Long Beach. “However, this economic situation is different.” An emergency budget measure approved in October halved the amount businesses in an enterprise zone could use to offset taxes in 2008 and 2009. And some observers in Sacramento expect several legislative attempts to limit the program to be unveiled in the coming weeks, forcing supporters to go on the defensive for the fi rst time in four years.<br />
<br />
“I think you’re going to have an all-out battle on enterprise zones similar to what we saw in the 2005-06 legislative session,” said Toni Symonds, the chief consultant to the state Assembly Committee on Jobs, Economic Development and the Economy. During that session, the committee conducted four months of hearings that led to a series of program changes.<br />
<br />
Still, Johnson and other proponents say the program generates more dollars for the state treasury than it loses from tax credits by increasing economic output and creating more jobs and, consequently, taxpayers. Threats to scale back the program also haven’t stopped cities from lining up to participate: Nearly a dozen were expected to submit applications for four zones up for renewal by a March 27 deadline, said Chris Westlake, deputy director of the state Department of Housing and Community Development.<br />
<br />
“As more cities and localities become aware of the program, they realize the benefi ts of it,” Westlake said. “They all start wanting one for their area to help during these economic times.” Zone Advantages The zones run the gamut from small industrial centers in cities to large swaths of rural areas, Johnson said. All have several factors in common: They are economically distressed and featuring high poverty and unemployment levels.<br />
<br />
Zones are designated for 15 years, after which They are eligible to reapply and compete with other jurisdictions for the designation, Westlake said. The title is awarded based upon a range of factors that include poverty and unemployment levels, but also account for marketing strategies, available property and businesses, infrastructure plans and local business incentives.<br />
<br />
“It’s not just a state incentive,” Westlake said.<br />
<br />
“It’s a state and local partnership here.” In the Shasta Metro Enterprise Zone, which runs from Anderson to Shasta Lake and includes the city of Redding, those local incentives include fast-tracking building permits and other regulatory processes and job creation policies that refund some application fees, O’Sullivan said. Redding also has its own utility district that can offer electricity rates 20 to 30 percent lower than competitors.<br />
<br />
Redding received its fi rst designation in 1991, and was re-upped in 2006, O’Sullivan said. In the past decade, the zone has been used to recruit several large employers, including Knauf Fiberglass in the late 1990s and, more recently, a health care provider that brought 75 jobs on 50,000 square feet of offi ce space.<br />
<br />
Businesses that either locate or expand inside an Enterprise Zone receive their largest tax advantages from the number of employees they hire, Johnson said. For each employee, provided more than half of the work is performed inside a zone, a company can earn as much as $37,400 per worker in state tax credits over a fi ve-year period.<br />
<br />
The state allows a hiring credit of up to 150 percent of minimum wage — or $12 an hour in California. Even if a worker starts at more than $12 an hour, as is the case in the described scenario, that maximum credit can be used for fi ve years of continuous employment, Johnson said.<br />
<br />
In the Shasta Metro zone, anywhere from 700 to 1,100 vouchers are granted each year to businesses, O’Sullivan said. Others are larger — zones in Los Angeles issued nearly 19,000 during the 2007-08 fi scal year — while smaller regions such as the Imperial Valley Enterprise Zone issue around 300, said manager Diane Cason. Across the state, 67,825 were awarded in 2007-08, according to state fi gures.<br />
<br />
O’Sullivan said the vouchers benefi t both employers and employees. The tax incentives encourage businesses to hire workers in areas they may otherwise have not considered, and the workers receive paychecks and the opportunity for advancement, he said.<br />
<br />
“They’re typically placed in areas where there are higher-than-normal poverty rates,” O’Sullivan said. “In all honesty, that’s our bluecollar workforce. That’s the folks that need the jobs the most.” Cason, whose zone includes Imperial County and the border city Calexico, believes the program is one of the few business attraction tools left in a state known for its high workers’ compensation rates, property costs and other business-unfriendly policies. She has seen the zone work better as a retention tool in recent years than as a magnet, giving businesses that might otherwise consider leaving for nearby Arizona or Nevada a reason to stay.<br />
<br />
“Frankly, California is not real businessfriendly,” Cason said. “This is one tool that offsets all of that.” In the Long Beach zone that Johnson oversees are 19,000 businesses of varying sizes, “from 7-11s to Boeing,” he said. One of those companies, a manufacturer of high-end treats for dogs and cats that employs 160 workers, hung on for more than a decade in part because of the advantage of being inside an enterprise zone.<br />
<br />
Confl icting Views But Red Barn Pet Products owner Jeff Baikie doesn’t believe the tax advantages outweigh the cost of doing business in town any longer. He is looking to move the company out of state, possibly to Texas, where property to build is three times less expensive to acquire.<br />
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“It’s a huge advantage. It’s instrumental,” Baikie said of the program. “But at the end of the day, with real estate and workers’ comp costs … it’s just getting tougher and tougher.” Some brokers representing tenants in California deals say that location in an enterprise zone isn’t typically high on the average business’ wish list, either. John Jarvis, a principal senior vice president with Irving Hughes in San Diego, said the high-tech and other growing fi rms he has represented are usually more interested in suburban areas that have become hubs for innovation.<br />
<br />
“More often than not, the fact that it is in an enterprise zone is not a driver,” Jarvis said. “It’s not like they’re asking me to fi nd them a property in an enterprise zone.” Bruce Hohenhaus, a senior vice president with Colliers International based in Sacramento, agreed that clients rarely seek enterprise zones while searching for properties. When told about the tax breaks and other advantages available to businesses in the zones, however, it can help to sway an employer who might otherwise be on the fence.<br />
<br />
“It’s defi nitely a bottom-line-plus,” Hohenhaus said. “I’d rather have it than not have it, and so would the tenants.” Linda Greenberg, a senior vice president with Colliers International in San Diego, said the industrial tenants she represents often aren’t aware of the program and its benefi ts. Once educated, however, businesses with large employment bases and high equipment costs are often eager to move into a zone, she said.<br />
<br />
“They go after it aggresively,” Greenberg said.<br />
<br />
Multiple, sometimes confl icting studies have been undertaken focusing on the benefi ts of Enterprise Zones across the state. A 2006 study commissioned by the state found that poverty and unemployment rates declined and incomes and median rents increased in the zones compared with the rest of the state.<br />
<br />
Another study from the University of California, Davis, concluded that 300,000 jobs were added in the state between 1992 and 2002 because of the program. That study also confi rmed that the tax revenues generated in enterprise zones outweigh their cost, according to Gov. Arnold Schwarzenegger’s offi ce.<br />
<br />
But others, such as a report by economics researchers David Neumark and Jed Kolko re - leased earlier this year, have argued that they are largely ineffective.<br />
<br />
The allowable tax credit that was suspended for 2008 and 2009 is scheduled to revert back to 100 percent in 2010, Steven Dotan of C&I Tax Consultants, a fi rm specializing in enterprise zones. That same legislation also provided a benefi t to the program as well: By canceling the ability to use prior losses to offset income in 2009 and 2010, it created more businesses that will owe taxes and have a need for credits, he said.<br />
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The jobs committee in early March released an economic recovery plan that includes recommendations to restore any cuts to enterprise zones or other economic development programs, Symonds said. She believes cutting programs aimed at job creation and economic recovery to accomplish short-term belt-tightening will only make the state’s fi scal crisis worse.<br />
<br />
“If we continue to starve the business community, it will only shed more and more jobs,” she said.<br />
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Johnson traveled to Sacramento in mid-March to address the committee about the need for enterprise zones in California. He acknowledges the threat that the state budget shortfall poses to the program, but believes any attempts to dial it back will be defeated as they have in the past.<br />
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“It’s a constant refrain. There’s always someone,” Johnson said. “But we’ve always managed to keep these things alive.” — E-mail Greg_Kane@DailyJournal.com

Getting Your Hands on EZ Money

Michael Gonzales And Zein Obagi Jr

Little-known competition rages among California’s economically depressed areas — and it does not involve the provision of stimulus dollars. Struggling communities, like Oxnard and Escondido, thirst for designation as an enterprise zone. EZ designees want to remain designees, and non-designees want designation — ASAP.<br />
<br />
Businesses throughout California should investigate whether they are located in an EZ and qualify to reap its many benefi ts.<br />
<br />
California’s Ezs were developed long before the nation’s current fi nancial downturn. Their value has only been enhanced by our economic woes. Last year alone, the Franchise Tax Board reports that taxpayers located in Ezs received $290 million in state tax benefi ts, among other local benefi ts. The report has caused the public and private sectors alike to wonder whether they could have, should have or can in the future take advantage of EZ money.<br />
<br />
What is the Purpose of an EZ?<br />
<br />
The Enterprise Zone Act authorizes the Department of Housing and Community Development to designate up to 42 California communities as Ezs. Ezs are designed to stimulate business growth in underperforming areas by providing various monetary and other incentives. EZ tax benefi ts alone create a climate where low-growth communities can develop more quickly than would be expected without these benefi ts.<br />
<br />
To qualify for EZ designation, a community must demonstrate an ailing local economy.<br />
<br />
Typically, a community maintains EZ designation for 15 years. Recent reports indicate that the HCD has received a record, and still growing, number of applications from municipal governments seeking EZ designation. The following list is of Ezs that currently benefi t from at least a conditional EZ designation.<br />
<br />
As of press time, 40 Ezs exist. Sacramento — Florin Perkins expired on April 4. Los Angeles — Harbor and Sacramento — Army Depot, however, are set to expire by the end of the year. The HCD, therefore, anticipates designating up to four additional Ezs during the current application round.<br />
<br />
How Can You Benefi t from an EZ?<br />
<br />
Ezs provide a wide range of tax credits and other economic incentives. The act authorizes an array of tools to stimulate growth. Local governments have wide latitude to select which tools will apply in a particular EZ. A business may qualify if it is located in an EZ and conducts at least 50 percent of its business there. Incentives include a hiring credit, sales or use tax credit, special business expense deduction, and a carry forward of 100 percent of net operating losses for 15 years, exceeding the standard 10-year allowance.<br />
<br />
For example, an EZ business may claim an EZ hiring credit for qualifi ed employees for a period of fi ve years from that employee’s hiring date. Businesses that move to an EZ with qualifi ed employees already on payroll can claim an EZ hiring credit provided that qualifi ed employee has been on payroll for less than fi ve years. EZ hiring credits are not available for qualifi ed employees on payroll for more than fi ve years. The maximum EZ hiring credit available in a qualifi ed employee’s fi rst year is $6 of the hourly wage paid. In an employee’s fi rst year, an EZ business can claim a tax credit of up to $12,000. This amount decreases for each year of employment and disappears after an employee’s fi fth year at the business. To claim this credit, both the qualifi ed employee and business must receive certifi cation from a local agency verifying the employee’s eligibility.<br />
<br />
Qualifi ed businesses may also claim credits for state sales or use tax paid for industrial machinery and common offi ce supplies such as photocopiers, telephones and fax machines.<br />
<br />
Of particular relevance in this economy, EZ benefi ts also extend to banks, the institutions in the nation’s spotlight. Lenders may deduct the net interest income received from a loan to a business located solely within an EZ during the effective dates of the EZ. This EZ benefi t may incentivize lenders to open credit — if EZ businesses alert lenders to the deduction.<br />
<br />
Besides tax credits and deductions, the act authorizes state agencies and local governments to lease property to EZ businesses at a price below fair market value. Local governments may also relax building codes and zoning laws, streamline the permitting process and eliminate or reduce taxes for EZ businesses.<br />
<br />
The act also empowers municipalities to develop local EZ incentives, and many have.<br />
<br />
However, EZ benefi ts are not automatic.<br />
<br />
Private businesses must claim EZ benefi ts or forego them. Lack of EZ publicity has been cited by scholars as one factor believed to diminish from Ezs’ success. For example, the Los Angeles Department of Water and Power offers a fi ve-year electric rate discount to new businesses that move into an EZ. A business must apply for the rate discount, as The LADWP will not automatically grant it. A reliable list of Ezs and local incentives can be found at www.ezpolicyblog.com. Are Ezs Effective at Achieving Growth?<br />
<br />
Though many already have reaped EZ money for years now, obtaining EZ money requires awareness, which may be lacking despite the program’s lengthy existence.<br />
<br />
Moreover, academics disagree on EZ money’s effi ciency. Studies by David Neumark and Jed Kolko of the Public Policy Institute of California have concluded that Ezs do not stimulate job creation and question whether the program is worth its costs to the public coffers.<br />
<br />
But University of Southern California Professor Charles Swenson argues that jobs should not be the only factor analyzed. An accurate analysis of Ezs must account for numerous factors indicative of prosperous economic activity.<br />
<br />
Newsweek recently credited, in part, the Compton EZ for the development of a lavishly landscaped $65 million strip mall on a previously vacant lot.<br />
<br />
Regardless of these differences, EZ money is available and can amount to real savings for many businesses. Businesses should consider which benefi ts they could claim, or the EZ opportunities they may want to pursue to mitigate against existing harsh economic times.